Question

Hemming Co. reported the following current-year purchases and sales for its only product. Date Activities Units Acquired at Cost Units Sold at Retail Jan. 1 Beginning inventory 200 units @ $10 = $ 2,000 Jan. 10 Sales 150 units @ $40 Mar. 14 Purchase 350 units @ $15 = 5,250 Mar. 15 Sales 300 units @ $40 July 30 Purchase 450 units @ $20 = 9,000 Oct. 5 Sales 430 units @ $40 Oct. 26 Purchase 100 units @ $25 = 2,500 Totals 1,100 units $ 18,750 880 units Required: Hemming uses a periodic inventory system. (a) Determine the costs assigned to ending inventory and to cost of goods sold using FIFO. (b) Determine the costs assigned to ending inventory and to cost of goods sold using LIFO. (c) Compute the gross margin for each method.

Answer 1

The total goods available for sale for the period is computed as follows:
Inventory, beg (200 @ $10) ----------------------------------------$2,000
1st Purchase (350 @ $15) ---------------------------------------------5,250
2nd Purchase (450 @ $20) ------------------------------------------9,000
3rd Purchase (100 @ $25) -------------------------------------------2,500
Total Goods Available for Sale -----------------------------------$18,750

(a) In computing the Ending Inventory and Cost of Goods Sold using FIFO method:
Total Goods Available for Sale ---------------------------------- $18,750
Less: Ending Inventory* --------------------------------------------    4,900
Cost of Goods Sold --------------------------------------------------$13,850

*Ending Inventory
Inventory, beg ---------------------------------------------------------- 200
Total Purchases -------------------------------------------------------- 900
Total Available Units ------------------------------------------------- 1,100
Less: Units Sold -------------------------------------------------------   880
Inventory, end ---------------------------------------------------------   220
Cost of Ending Inventory
 100 × $25 = $2,500
 120 × $20 =   2,400
220              $4,900

(b) In computing the Ending Inventory and Cost of Goods Sold using LIFO method:
Total Goods Available for Sale ---------------------------------- $18,750
Less: Ending Inventory* --------------------------------------------   2,300
Cost of Goods Sold --------------------------------------------------$16,450

*Ending Inventory
Inventory, beg ---------------------------------------------------------- 200
Total Purchases -------------------------------------------------------- 900
Total Available Units ------------------------------------------------- 1,100
Less: Units Sold -------------------------------------------------------   880
Inventory, end ---------------------------------------------------------   220
Cost of Ending Inventory
 100 × $20 = $2,000
 120 × $15  =       300
220              $2,300

(c) The Gross Margin for FIFO and LIFO
                                                               FIFO                             LIFO
Sales (880 @ $40) ------------------------$35,200 -------------------$35,200
Cost of Goods Sold ----------------------   13,850 --------------------   16,450
Gross Margin --------------------------------$21,350 -------------------  $18,750